The American labor market is loosening enough to satisfy Federal Reserve Board inflation fighters, without frightening economists into abandoning their prediction of a soft landing, or preventing consumer sentiment from turning cheerier, as it has. The private sector added 199,000 jobs in November, but about 50,000 were striking workers leaving picket lines for the workplace, and estimates of jobs created in September and October were revised down by 35,000. In these days when the inflation-fighter rules the OK corral, that slower hiring passes for good news.
Powell Can’t Blame The Labor Market Any Longer
Additional indications that any inflationary pressure coming from the labor market is easing:
· Job openings are down from their 12-million high in March 2022 to 8.7 million, the lowest level in more than two years.
· The quit rate has dropped from a peak of 3 per cent to 2.3 per cent as workers think thrice before quitting to seek better pay or a more acceptable work environment.
· The unemployment rate has risen from 3.4 per cent in January to 3.7 per cent in November.
· The number of unemployed workers seeking an extension of their jobless benefits has risen to 1.6 million from 1.3 million last year.
Not surprisingly, the upward movement of pay has slowed. Average hourly earnings are rising at their slowest rate since June 2021, although the annual rate of 4 per cent remains high enough to reinforce the Fed’s determination to resist calls for early interest rate cuts.
A Cooler Labor Market In A Cooler Economy
Manufacturing activity has been contracting for thirteen consecutive months. The housing market is at a standstill, with both new construction and sales of existing homes showing double-digit declines from last year in response to a jump in mortgage interest rates from around 3 per cent to 7-8 per cent. Forty per cent of Americans own their homes mortgage-free, many others are paying around 3 per cent. These homeowners are frozen in place, unlikely to give up their low-interest advantage for the new bigger or smaller home usually purchased as life progresses.
A Soft Landing Hoves Into View Through The Fog
Inflation is closing in on the Fed’s 2 per cent target with no recession on the horizon. A survey of its members by the National Association of Business Economists found that only 24 per cent see a recession in 2024 as more likely than not. “Our research team … have moved to the soft landing category,” says Brian Moynihan, echoing a widely shared view.
So when the Fed gathers later today to review its economic projections the gurus will face an economy that is growing, real wages increasing, inflation easing. That all adds up to the “soft landing” that Fed chairman Jay Powell has steadily hinted he deems a possibility. Specifically, that means that we are heading for 2 per cent inflation and 1.8 per cent growth, and some self-congratulatory remarks – which will not gladden the hearts of those who believe the economy should be positioned for more rapid growth.
Unless we aren’t. Some argue that getting from 9 per cent inflation to around 3 per cent was a snap, bushels of low hanging fruit, compared to the chore of getting from three per cent down to the Fed target of two per cent. Others point to the fact that the prices of some goods are actually declining, and contend the Fed should elevate the chances of a soft landing by lowering rates to prevent a recession.
Right now I believe it fair to say that the members of the soft-landing-pilots’ association are in the majority. But the America from which we deplane after that soft landing is not the country from which we departed. That America had a central bank taking its benchmark interest rate from zero to 5.25-5.5 per cent, a 22-year record, at a record pace. The America at which we arrive has a central bank that has holstered its rate-increase weapon and is planning to leave it there, unused but accessible. The debate has shifted from how high the Fed will take rates to how long they will hold them at that level. My guess is for a good long while, rather than mid-2024 which seems to be a consensus expectation. Not because the tea leaves or models support that view. But because the Fed’s fear of a re-emergence of inflation exceeds its fear of a tightening overshoot, and that it can more quickly rev up the economy if need be than it can reinstitute measures to contain a revival of inflationary price increases.
The Arrival Lounge Ain’t Like the Departure Lounge
Passengers emerging after the soft landing find a labor market very different from the one in the days before the Wuhan pandemic. The labor force participation rate, at 62.8 per cent, is well above the pandemic low of 60 per cent, and the highest since February 2020. The portion of working-age women (25-54 years old) in the labor force, which plummeted during what is called the lockdown “she-cession”, is at a record high. The per cent of families with both spouses working has risen, with implications for family life that we will have to wait for the sociologists to tell us.
Then there is the re-emergence of trade unions, hardly a key factor in wage-setting when we boarded the rate-cut express. A self-described “most pro-union President in American history,” has lavished contracts and benefits on firms that employ union labor. The unions have as their target the recent 50 per cent rise in corporate profits. And are confident that the law as administered by the Biden appointees protects membership drives and striking members such as those in the hotel, movie, delivery services and auto industries from retaliation.
The very structure of work has also changed. Pandemic-induced lockdowns encouraged workers to reconsider what is called the work-life balance, which rethink resulted in a demand for less of the former and more of the latter. Friday, once the last day of the work week (remember TGIF?), is now the first day of the weekend, while the first day of the workweek in many places has become “bare minimum Monday”, its main function being a gradual easing into the demands of Tuesday, Wednesday and Thursday.
Most important, the market capitalism in the form in which it existed only a few years ago is no more. President Biden, amid cheers from his left, has substituted managed for free trade. Republicans have collaborated with Democrats to consign fiscal prudence to the scrapheap of history, threatening the primacy of the dollar. Decisions once taken by the interaction of individuals in free markets – EV or petrol-powered vehicles, a gas or electric range – are now made by bureaucrats, as moans from auto dealers watching unsold EVs pile up on their lots and chefs whose taste buds are more delicate than Biden’s are warning those with a penchant for fine dining. Some call it progress, others fear a brave new world.
More than 70 per cent of the debarking passengers wonder how their country can be on a wrong track after a soft landing.